The Future of a Radical Price
Hyperion, 2009, 274 pp. ISBN 978-1-4013-2290-8
Chris Anderson is the editor in chief of Wired magazine. He is also the author of an international best seller, The Long Tail. In this book he makes the case that businesses can often make more profit by giving things away than by charging for them. Free is a business strategy that may be necessary for business survival.
The paradox of Free: "People are making lots of money charging nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00." (Prologue)
"Free is full of apparent contradictions: You can make money giving things away. There really is a free lunch. Sometimes you get more than you pay for. (Prologue)
The Google Generation has grown up online simply assuming that everything digital is free. (Prologue)
1. The Birth of Free
Genessee was only able to open up the market for Jell-O by handing out free booklets of recipes to homemakers. Gillette sold his razors cheaply to companies that gave them away as promotional items and he made money on the blades. Companies give away the cell phone and sell the monthly plan. But this century's "free" is a new economic model where the primary price is zero. This is being driven in the digital age by the rapidly dropping cost of computer processing power, bandwidth, and storage.
2. Free 101 - A Short Course on a Most Misunderstood Word
"All forms of Free boil down to variations of the same thing: shifting money around from product to product, person to person, between now and later, or into nonmonetary markets and back out again. Economists call these 'cross-subsidies.'" (20)
• Paid products subsidizing free products (Loss leaders)
• Paying later subsidizing free now. (Cell phone contract)
• Paying people subsidizing free people (Kids get in free)
• A free product entices you to buy something else (Buy one get one free)
• Third party market (CBS provides free TV and advertisers pay for it.)
• Freemium (The basic level is free but you can pay for a better version.)
• Free with no expectation of payment (Wikipedia, Freecycle)
• A price of "less than nothing." You might get paid to use a product or service, e.g. for purposes of a research or marketing study.
3. The History of Free - Zero, Lunch, and the Enemies of Capitalism
"The story of the twentieth century is extraordinary social and economic change driven by abundance." "Just as water will always flow downhill, economies flow toward abundance. Products that can become commoditized and cheap tend to do so, and companies seeking profits move upstream in search of new scarcities." (52) "…as commodities become cheaper, value moves elsewhere. …the highest profit margins are usually found where gray matter has been added to things." (54)
"Abundance thinking is not only discovering what will become cheaper, but also looking for what will become more valuable as a result of that shift, and moving to that." (54)
4. The Psychology of Free - It feels good. Too good?
Sometimes "free" discredits the item but other times it doesn't. Price is all about perception. A lower price is better for subscribers but a higher price is better for advertising because it means people value the product enough to pay for it.
Paying anything is a disincentive. It raises a flag. We have to make a choice. If the price is zero the flag doesn't go up. We tend to choose things that require the least thinking. Charging any price creates a mental barrier that most people won't cross. Free speeds right past the decision. The difference between Free and almost Free is monumental. "The imposition of a price, no matter how low, typically decreases participation, often radically." (67)
Here's one business model: (69)
1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone.)
4. Do it again and again, building a 40 percent profit margin into the products to pay the bills."
5. Too Cheap To Matter - The Web's Lesson: When Something Halves in Price Each Year, Zero is Inevitable
Computer processing power, digital storage and bandwidth are getting too cheap to meter. (77) Since prices keep dropping, you can afford to sell it today for what it will be worth tomorrow. This is called "anticipating the cheap." (79)
"Ideas are the ultimate abundance commodity, which propagates at zero marginal cost. Once created, ideas want to spread far and wide, enriching everything they touch." (83) "And the more products are made of ideas, rather than stuff, the faster they can get cheap." (84)
6. "Information Wants To Be Free" - The History of a Phrase that Defined the Digital Age
There is an economic link between technology and ideas. "Information wants to be free in the same way that life wants to spread and water wants to run downhill." (97)
"Commodity information (everybody gets the same version) wants to be free. Customized information (you get something unique and meaningful to you) wants to be expensive." OR "Abundant information wants to be free. Scarce information wants to be expensive." (97)
The "bits" are virtually free but their meaning may have a wide range of value, from nothing to priceless. (100)
7. Competing with Free - Microsoft Learned How to Do It Over Decades, but Yahoo Had Just Months
8. De-Monetization - Google and the Birth of a Twenty-First-Century Economic Model
Google is the biggest company in history built on giving things away. It offers nearly 100 products from photo editing software to word processors and spreadsheets, and almost all of them free. It hands out a lot of things to make money on a few. It makes enormous amounts on advertising. New services start with asking what would be cool? What might people want? How to make money from it is a later question.
Build something people want. Use Free to test whether it works and people like it. If they do, figure out what consumers might pay for or how else to make money. (120, Paul Graham, the founder of Y Combinator, a venture capital firm for small start-ups)
Free is Google's default because it reaches the biggest possible market. Google is always dreaming up new things to give away. The challenge is how to convert it to cash. "It's all about engagement into Google and that if we can get you, at some point in your engagement with Google, to end up using Google for something that we can monetize, the sums work." (125, CEO Eric Schmidt)
"Everybody can use a Free business model, but all too typically only the number one company can get really rich with it." (132)
9. The New Media Models - Free Media is Nothing New. What Is New is the Expansion of That Model to Everything Else Online.
Six Reasons for Free (141-42)
Ways to make money virtually (for example in online free games):
• Sell virtual items (like virtual clothes and power)
• Subscriptions - for a higher category of games
• Advertising - showing up as billboards and brand names in games
• Real Estate - virtual property and upgrades of property
• Merchandise - real stuffed animals that are in games, such at Webkinz
• Live shows promoted by free music
• Real books promoted by free downloads of sections or whole books
10. How Big is The Free Economy - There's More to It Than Just Dollars and Cents
"Facebook 'friends' are a classic unit of reputational currency. The more 'friends' you have, the more influence you have in the Facebook world, and the more social capital you have to spend." (163) "The value of attention and reputation is clearly something, or companies wouldn't spend so much on advertising to influence them." (164)
11. ECON 000 - How a Century-old Joke Became the Law of Digital Economics
In a competitive market, price falls to the marginal cost, i.e., the cost just above production costs. Today we are building the world's most competitive market where the marginal cost is close to zero.
When a great many people use a product, others feel compelled to do so also and it creates a monopoly that can charge high rates (read Microsoft software). On the contrary, on-line companies can't command monopoly-like prices. Ad rates on Facebook are extremely low. A lot of people ride for free, but they make their billions on the few, simply because the few may still be thousands or millions of people. It is a matter of scale. If you don't have the scale, you must get more creative!
12. Nonmonetary Economies - Where Money Doesn't Rule, What Does?
A wealth of information creates a poverty of attention. (Herbert Simon, 1971)
"Every abundance creates a new scarcity. We tend to value most what we don't already have in plentitude." (180)
When more products are offered for free, we are working in an "attention economy" and a "reputation economy." "Good recommendations build trust with a readership, and being recommended confers trust, too. And with trust comes traffic." (183) On a typical web site ¼ to ½ the traffic comes from Google searches. People can build reputational capital and turn it into attention. "What our 'free labor' in an area that we value grants us is respect, attention, expression, and an audience." "No wonder the Web exploded, driven by volunteer labor--it made people happy to be creative, to contribute, to have an impact, and to be recognized as expert in something." (189)
13. Waste is (Sometimes) Good - The Best Way to Exploit Abundance is to Relinquish Control
"Today's innovators are the ones who spot the new abundances and figure out how to squander them. In a good way!" (191) Waste is relative to your sense of scarcity. The dandelion scatters its seed indiscriminately and dandelions occur in every sidewalk crack. "Perhaps the best example of a glorious embrace of waste is YouTube." (193) All the random videos on YouTube are dandelions seeds in search of fertile ground. (195)
You must be discriminating for valuable air time on CBS News, but on YouTube the cost of failure is miniscule so take chances. But so far, YouTube has failed to make money for Google.
14. Free World - China and Brazil Are the Frontiers of Free. What Can We Learn from Them?
"China is a country where piracy has won." Chinese music consumers can find everything they want for free. "Piracy is a form of zero-cost marketing, which brings their work to the largest possible audience." (199) It's up to the celebrity to find ways to convert their celebrity to cash. If she makes her money on the concert tour, then her pirated CDs are her best marketing.
"Piracy extends to virtually every industry in china…. Today, an entire industry exists in China to clone designer goods overnight." (202) People who can't afford the real things buy the fakes. All the fakes create publicity for the real. You can even buy fake price tags and fake receipts. It's the status that's important.
15. Imagining Abundance - Thought Experiments in 'Post-Scarcity' Societies, from Science Fiction to Religion
"Our brains are wired for scarcity; we are focused on the things we don't have enough of, from time to money. That's what gives us our drive. If we get what we're seeking, we tend to quickly discount it and find a new scarcity to pursue. We are motivated by what we don't have, not what we do have." (213)
16. "You Get What You Pay For" - And Other Doubts About Free
Anderson refutes fourteen arguments against Free.
"It's easy to compete with Free: simply offer something better or at least different from the free version." People still walk past the free coffee in the office break room to go spend $4 for a venti latte at Starbucks.
"The way to compete with Free is to move past the abundance to find the adjacent scarcity. If software is free, sell support. If phone calls are free, sell distant labor and talent that can be reached by those free calls…. If your skills are being turned into a commodity that can be done by software,…then move upstream to more complicated problems that still require the human touch. Not only can you compete with Free in that instance, but the people who need these custom solutions are often the ones most willing to pay highly for them." (231)
CODA - Free in a Time of Economic Crisis
"If your firm is less than three years old and under $1 million in revenues, you can use Microsoft's software without charge under its BizSpark program. When those companies get bigger, Microsoft is betting that they'll keep using its software as paying customers. In the meantime, the program costs Microsoft almost nothing." (239)
"Free is not enough. It also has to be matched with Paid. …today's Web entrepreneurs have to invent not just products that people love but also those that they will pay for. Free may be the best price, but it can't be the only one." (240)
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